The numbers game

We reported in Taxation 12 May 2005, page 152, that we would be taking up the issue of the number of companies which might be affected by s 660A with HMRC. In particular we wanted to raise the continued use by HMRC of the estimate of 30,000 when the methodology for reaching that figure had already been criticised (Taxation 25 November 2004, page 198).
We have subsequently put this argument to HMRC in more detail. Our criticism is that their figure was obtained by querying the well-known FAME database, and asking how many companies with two shareholders and either one or two directors had paid dividends in the past year. However, FAME takes its information from accounts submitted to Companies House, and can only identify companies paying dividends when a profit and loss account is filed. The vast majority of companies formed to provide the professional services of one individual, such as Arctic Systems Ltd, are well within the small company exemption, and therefore only submit an abbreviated balance sheet. They do not, therefore, get included in the count of companies paying dividends.
In discussion with us, HMRC say that they know that the figure of 30,000 is incorrect, partly for the reasons given in Taxation (which they accept as valid criticisms) and partly because companies which fit the criteria may be excluded from s 660A on other grounds — for example that both shareholders work full-time in the business. They also point out (and we can confirm) that whenever the press office issues detailed guidance on the numbers, they stress that the true figure could be higher or lower than the 30,000. These caveats rarely get reported, and in particular the press reports following the High Court decision in Jones v Garnett tended just to quote the figure of 30,000 as the Revenue's estimate.
Despite the acknowledged problems with their own figure, however, HMRC consider that all other figures put forward so far are entirely speculative, with little in the way of scientific or statistical methodology to back them up. HMRC's own experience of the number of cases referred to the specialist unit dealing with s 660A by districts (even after the subject became so well-known with the issue of Tax Bulletin 64) is that the estimates of 200,000 or more appear to be excessive.
The problem seems to be rooted in the different experiences and perceptions of HMRC on the one hand and the profession on the other. HMRC have not, in general, found s 660A to be an issue that affects a substantial number of taxpayers, and therefore believe that the figure of 30,000 is a realistic counterweight to the much higher figures put out by the profession, despite the problems involved in using any commercial database to make an estimate. They also point out, quite rightly, that the number of companies now potentially affected includes those who incorporated since the issue of Tax Bulletin 64, and who should therefore have been on notice of the Inland Revenue's point of view.
The profession, on the other hand, is aware of the huge rush to incorporation well before the issue of Tax Bulletin 64 and the concerns expressed by many practitioners that this will affect a significant number of clients. In that context, the figure of 30,000 seems far too low, and figures of 200,000 or more seem realistic, and in line with experience. It is this difference of perception that is really at the heart of the dispute. The non-specialist press, in particular, are always keen for commentators to put a concrete figure on the number affected. Perhaps all of us, Taxation included, should pull back from putting figures forward in future, and simply accept that although the perceptions of the size of the problem differ between Revenue and the profession, neither side can yet provide figures which stand up to serious examination.

Issue: 4012 / Categories: Comment & Analysis , Arctic Systems , Jones v. Garnett , Income Tax